Tom Ackmann, Managing Director of Baden Retirement Plan Services, has published, "Relief for Safe Harbor 401(k) Sponsors: Reducing or Suspending Contributions Now Permitted by the IRS." The article appears in the "Small Business Survival Guide," a special insert in the July 31, 2009 issue of
The Greater Fort Wayne Business Weekly newspaper. Tom's article is provided below. For more business news and updates for Northeast Indiana, visit
The Greater Fort Wayne Business Weekly. Please
contact us with questions about how the information in this article applies to your specific situation.
Relief for Safe Harbor 401(k) Sponsors: Reducing or Suspending Contributions Now Permitted by the IRS
By Thomas R. Ackmann, Managing Director, Baden Retirement Plan Services
The economic realities of current days have left a large number of employers with a vast number of decisions. Seeking ways to cut costs while keeping their doors open has become a challenge faced by many business owners.
While other items related to a running a business may garner more interest, the 401(k) plan should not escape notice. Depending on the plan design in place, there may be ways to lower the business owner’s financial obligation while retaining this valuable retirement tool for the future.
The most flexible types of qualified retirement plans allow a plan sponsor to elect annually whether or not they are going to make a contribution to their employees. This decision may be made at the beginning of the year or at the end of the year. For plan sponsors that chose to make a matching contribution on a “per pay period basis” for the 2009 plan year, they can choose to stop this contribution at any time by executing an amendment to the plan document to that effect. Should the election be made at the end of the year, they would simply choose not to make any contribution.
As a way to acknowledge businesses hurt by the recession, the IRS recently granted unprecedented relief to 401(k) Safe Harbor Plans by allowing the reduction or suspense of previously required non-elective contributions.
Unlike a 401(k) Plan that may have a discretionary employer contribution feature, the Safe Harbor Plan 401(k) Plan allows a plan sponsor to not be subject to certain required annual testing limits provided it obligates itself to an annual contribution. This contribution may take the form of a matching contribution based on an employee’s deferral or it can be a percentage of an eligible employee’s pay. Either way, the plan sponsor was required to provide a notice prior to the beginning of the plan year that “promised” and defined the contribution that was to be made.
Regulations issued by the IRS allow plan sponsors experiencing business hardships to reduce or suspend the Safe Harbor contribution for the first time ever. A “substantial business hardship” will be evidenced by factors such as:
· The business is operating at an economic loss,
· Substantial unemployment or underemployment in the employer’s trade or industry,
· Declining sales or profits specific to the employer, or
· An expectation that the plan might terminate if relief is not given.
Once it has been determined that a “substantial business hardship” exists, specific steps must be taken with regard to the cessation of employer contributions.
- An amendment to the plan document must be executed by the plan sponsor; the plan sponsor should contact the plan document sponsor to request the amendment.
- A notice must be provided to all eligible employees stating that employer contributions will be reduced or suspended the later of 30 days after the date of the notice or the date the amendment is adopted. The notice must contain some very specific information so that plan participants are aware of this decision. Included in the notice must be verbiage explaining the effect of the reduction or suspension of nonelective contributions, the effective date of the reduction or suspension of nonelective contributions and the procedures for changing employee contribution elections.
- During this thirty day period, participants are given the opportunity to change their contribution amounts in light of changes to the plan.
- The plan sponsor must continue to make matching contributions throughout this 30 day period or consider income as basis through the end of this 30 day period when calculating the employer contribution.
Since the plan was not able to retain its Safe Harbor status for the entire year, it will become subject to the testing requirements that would have otherwise been met. The plan will have to abide by Actual Deferral Percentage (ADP) Testing results and Actual Contribution Percentage (ACP) Testing results as well as meet any existing Top Heavy Contribution obligations.
It would be good to point out that the Safe Harbor contribution cannot be reduced or suspended on a retroactive basis once the plan year has ended. It would be wise for a plan sponsor that does not normally make this contribution until the year is over to review their situation and determine is action needs to be taken now.
Retirement Plans that are designed properly with a specific type of business in mind can weather many storms. The absence of an employer contribution in a year like this does not have to mark the plan as a failure or not worthwhile. For those participants that can still contribute, the benefit of a pre-tax dollar being used to purchase an investment at a low cost can be all the benefit that one needs.